* Ruling could spark industry consolidation
* Court called FCC rule "arbitrary and capricious" (Adds FCC comment, updates stock prices)
By Jeremy Pelofsky and John Poirier
WASHINGTON, Aug 28 A U.S. court struck down a rule limiting a cable company to no more than 30 percent of the subscription television market, a victory for companies like Comcast Corp (CMCSA.O) that could spark many industry deals.
The U.S. Court of Appeals for the D.C. Circuit ruled on Friday that the Federal Communications Commission's rule, adopted in late 2007, was "arbitrary and capricious" and vacated it. The regulation was first set in 1993, but has been repeatedly challenged.
Shares of Comcast, which brought the case and is the biggest U.S. cable provider with a 24 percent market share, closed 16 cents higher, or 1 percent, at $15.71 on Nasdaq. The stock of smaller provider Cablevision Corp CVC.N closed 3.8 percent higher at $22.61 on the New York Stock Exchange.
The court sharply criticized the FCC, saying the agency's "dereliction in this case is particularly egregious" because it failed to heed the court's past order to take other providers into consideration when setting a new cap.
"The commission has failed to demonstrate that allowing a cable operator to serve more than 30 percent of all cable subscribers would threaten to reduce either competition or diversity in programming," the court said.
The judges pointed to rising competition among video providers, including satellite companies like DirecTV Group Inc DTV.O as well as telephone companies like AT&T Inc (T.N) and Verizon Communications Inc (VZ.N), which have been rolling out their own subscription television services.
"Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992," the court said.
Telephone and cable providers over the last few years have been jumping into each other's businesses so they can offer subscribers a package of television and communications services -- a bundle that can help boost their profits.
ROOM FOR MERGERS
The ruling, which could spark a round of mergers among companies that provide pay TV services, presents a major challenge for new FCC Chairman Julius Genachowski, a Democrat, who will now have to decide whether to appeal to the Supreme Court, draft a new rule, or abandon the regulation altogether.
"The FCC staff is currently reviewing the court's decision with respect to the limit previously adopted and the commission will take this decision fully into account in future action to implement the law," Genachowski said in a statement.
The decision came one day after the full FCC voted unanimously to launch an inquiry to examine competition in the U.S. wireless industry, a step that could lead to probes of other sectors including cable and broadband.
Comcast said the court ruling was a vindication.
"This important decision affirms that rules must reflect the changing realities of the dynamic video marketplace where today consumers have more choice in video providers and channels than ever before," spokeswoman Sena Fitzmaurice said.
A Stifel Nicolaus analyst report said the ruling could pave the way for Comcast to buy companies like Cablevision, Charter Communications Inc CHTRQ.PK or Cox Communications, but it could still face new FCC restrictions and an antitrust review.
"We believe regulators are likely to eventually create a new cap or other rules that give cable companies more headroom," the report said.
Media Access Project, a public interest group, expressed disappointment with the ruling and vowed to fight the cable industry's "anti-competitive" ownership structure that it argued has raised prices and limited choices for consumers.
The case is: Comcast Corporation, National Cable & Telecommunications Association et al v Federal Communications Commission and USA, CCTV Center for Media & Democracy et al, No. 08-1114. (Editing by Gerald E. McCormick, Leslie Gevirtz, Tim Dobbyn)